How Uber made taxis attractive again and how it will tap into the sharing economy – Business model revolution

In 2009, Travis Kalanick and Garrett Camp founded Uber, the app that has revolutionized the taxi and personal mobility industry. Uber is currently active in 68 countries and is planning further global expansion (Uber, 2015). Uber’s value proposition has hit the traditional taxi industry at its core. On Christmas Eve in 2015, Uber passed the milestone of one billion rides (Kokalitcheva, 2015). On December 2015, Uber was valuated at $62,5 billion (Austin et al., 2015). Compared to its valuation in August 2013 of $3,8 billion, it is a staggering valuation growth of over 1545 percent in little under 30 months (Austin et al., 2015) (see figure 1). Comparing Uber’s soar in valuation to NASDAQ, Microsoft and Facebook for the same period makes its rise even more apparent (see figure 2).

The phrase mentioned in the introduction went viral in 2015 (‘The world’s largest taxi company [Uber], owns no vehicles’) and illustrates the impact Uber has on the taxi industry. However, it is inaccurate. Uber’s business model resembles two-sided, marketplace business models (such as eBay) rather than taxi companies; its value proposition is highly dependent on their IT capabilities and their revenue model. The reason why Uber is revolutionizing the market, is that it has been able to link online business model benefits (e.g. ease of use, convenience, speed) with the ‘offline’ experience of taxi services.

Faster: The end-to-end process of ordering a ride is faster; waiting time is reduced due to that users know where the driver is, and how long it will take for the driver to arrive.

Cheaper: UberPOP, allows individuals (non-professionals) to work as a driver with lower fees for consumers.

On the other end of the business model, the benefits of the value proposition towards drivers are:

Easier: No more need for searching for customers’ location, the app provides the location of the customer and provides directions; finding a ride does not require receiving calls or looking out the window to spot potential customers; the app notifies you of new customer ride requests.

Better: Taxi drivers get to rate customers as well as being rated, leading to more pleasant interactions with customers.

Faster: Waiting times significantly reduced, since anywhere in a given location, customers can now easily request a ride (as opposed to waiting in a line of other taxis at the airport).

Cheaper: Uber claims it is more beneficial for drivers to work via their app (20 percent commission is incurred by Uber; the remainder is for the driver).

Pricing model

Besides the benefits of its value proposition to drivers and customers alike, Uber’s pricing model deserves some attention. Besides the 20 percent commission fee, Uber uses surge pricing to manage demand (Uber, 2015). Surge pricing occurs when there is high demand and low supply, leading to, sometimes shockingly (RT, 2016), higher prices. Obviously, drivers welcome a much higher rate, however, due to Uber’s data analytics capability, it can forecast high demand, communicate to drivers (who are incentivized through the high potential number of rides and possibility of surge pricing) and subsequently manage demand.

Get-keep-grow

Early adopters were a key growth lever for Uber when it launched its app in San Francisco (GrowthHackers, 2015). The tech-savvy San Franciscans are continuously looking for technology to improve their lives, and word-of-mouth travels fast among the internet-connected. Uber took to sponsorships in order for word-of-mouth to start snowballing; For example, Uber gave away free rides for people attending various (tech) events.

Concurrently, Uber used, and still uses, an invitation-based growth model in which users are incentivized to invite friends to start using Uber; both the inviter and the invitee are rewarded with money in their Uber accounts to be used for their next ride.

Future of Uber

In my opinion, the real revolution lies not in Uber’s current proposition, nor in the controversial UberPOP. Recently, Uber announced it is looking into two new ridesharing services named UberHOP and UberCOMMUTE (Tarantola, 2015). Whereas Uber’s current proposition is mostly a platform to match up consumers and drivers, UberHOP and UberCOMMUTE aim to tap into the sharing economy where multiple consumers are matched up to share a ride. If these new propositions work as well and easy as Uber’s current proposition, drivers will see a steep drop in total trips and, consequently, revenues.

Besides adjacent propositions, what lies ahead of Uber is not only further global expansion; Uber has launched two other propositions under the names of UberCARGO (Uber, 2015) and Operator (Operator, 2015). With a similar business model, UberCARGO aims to bring transporters and customers together. Operator, on its turn, aims to digitize 90 percent of commerce that is not digital; it works as a crowd-sourced hotel concierge with its services just a text message away. Uber’s disruptive path in creating efficiency in any market that is transportation-related promises a lot more than what we have already seen in the past couple of years.